Affiliated Service Group in Physician/Hospital Joint Venture

[Guest aciepluch]

A hospital ("Hospital") was formed as an LLC. A number of physician-owned professional service corporations ("Dr. Groups") are owners/members of the Hospital. In addition, a number of the physicians who are employees of the Dr. Groups ("Physicians") own interests in the LLC. The ownership interests of the Doctor Groups and the Physicians vary, but none is high enough to constitute a controlled group with the Hospital. The Physicians provide services to patients at the Hospital. Currently, on average, the Physicians perform about 50% of their total cases at the Hospital. The rest are performed at other area Hospitals. That percentage is expected to increase to about 70% by year end.

A number of parties involved in this arrangement are saying that this type of arrangement is very common and that it can't possibly constitute an affiliated service group. How have others treated this type of arrangement? If you haven't treated it as an affiliated service group, on what basis have you done so?

Thanks.

[KJohnson]

I agree that this is a situation that you hear "everyone does it". However, you just have to walk through the analysis and ask them how can it possibly not be an ASG. There may be things you can do with intervening C Corps between the doctors and their investment in the hospital (there are different attribution rules of of C. Corps) so that the doctors will not be deemed to own a piece of the hospital, but it all takes careful planning and probably a 5300 filing for an ASG determination.

Below is a "blurb" from an ALIABA outline on personal service corporations.

4. For example, Dr.Ais a 20 percent shareholder of his medical practice, Clinic,

P.A. and a one percent limited partner in Imaging, Ltd. Imaging, Ltd. does

diagnostic imaging for patients of practices in the region, including Clinic,

P.A. Imaging, Ltd. has 15 nonexempt employees and Clinic, P.A. has eight.

Dr. A’s fellow shareholders are not even aware of Dr. A’s ownership in

Imaging, Ltd. and adopt a defined benefit pension plan. This plan is disqualified

under section 401(a)(26). This is because Clinic, P.A.’s plan only covers

approximately 35 percent of the total employees of Clinic, P.A. and Imaging,

Ltd. (i.e., 8 divided by the sum of 8 + 15) which fails the 40 percent test).

It can be found here:

http://www.lhdl.com/whats_new/article_pdfs...orporations.pdf